Friday, January 6, 2012

The 1 Percent

With most of the 99% ers being uprooted from their occupations by police throughout major cities, the movement continues with somewhat dubious goals and ideology. The fundamental argument of income inequality in America is, however, undeniable. And things are getting worse. The concentration of income has actually grown far more severe over the past three years of the Obama administration, although to be fair it's hard to see how the Administration's policies have at least directly fostered this outcome.

The Federal Reserve, however, is fairly open about their role in pushing inequality to new limits, although they wouldn't state it quite so candidly. Bernanke is on record before Congress testifying that Fed policy is designed to inflate the value of risk assets. Bernanke's argument is that by making (safer) assets like bank deposits and Treasury bonds so utterly painful to own (due to negative inflation adjusted returns) Americans are in effect forced into investment in higher yielding and riskier assets. The greater the demand for risk assets, the higher the values. These risk assets, however, including stocks, corporate bonds and high yield bonds are disproportionately held by the most wealthy of Americans.

As these assets generously appreciate due to increasing investment, Americans - albeit already wealthy Americans - realize a greater wealth effect, thereby promoting more consumption of the stuff we already own way too much of. This conspicuous consumption promotes economic growth and in the long run (perhaps the very long run) employment gains.

Democrats used to scoff at this age old economic argument, applying the term "trickle down economics" to deride the notion that the rich get richer and then, eventually, everyone else will benefit as the crumbs trickle down to the masses. Hard to swing this argument too aggressively now, though, with a liberal Democrat in the White House.

Be this as it may, our thoughts center around this 1% and the growing chorus of concern about income inequality. For the most part, this topic of inequality is seldom raised without the parallel discussion of raising marginal tax rates, in an effort to make the progressive tax system so much more progressive. Truth be told, raising the top tax bracket to 100% will do little to address the issue of income inequality in America.

Higher tax rates, of course, will only impact after-tax incomes and have no impact on the fundamental issue of what people earn. We raise this point, not facetiously, but rather to address a more profound conundrum in contemporary American society: why is there such great income inequality?

To begin with, let's look at the most wealthy of income earners in America. And we need not look any further than the Entertainment Industry. Lady Gaga, earning $70 million last year, will dwarf by six or seven-fold the income of Lloyd Blankfein, CEO of Goldman Sachs, or Jamie Dimon of J. P. Morgan. Perhaps the occupy movement should have started out as Occupy Hollywood? To be far more relevant, though, the movement should of course be an Occupy Washington effort, for this is where the rules are made by which income inequality is allowed to exist. Hardly reasonable to blame Gaga or Blankfein for simply playing the game so well.

But why do such income disparities exist? For the answer, we need to understand the economics of the labor markets. According to Sports Illustrated, Eli Manning of the New York Giants, at #50 on the list of highest paid athletes in 2010, made $15 million. The top paid athlete that year was Tiger Woods, who together with endorsements earned a staggering $128 million. By comparison, according to Forbes magazine, James Gorman, CEO of Morgan Stanley made a paltry $6.5 million - chump change for a top paid athlete.

Moving beyond Tiger, film, TV and music celebrities are at the very top of the 1%, leaving their sports celebrity counterparts to park their cars. Again, per Forbes, the top 10 actors in Hollywood took down a combined $350 million in income in 2010. Talk about income inequality!

It might be interesting for us to ponder the forces that create such income disparity and what could be done to address it. It's far easier though, for the American public to bite down hard on the idea of a system to ameliorate after-tax income inequality through higher tax rates. After all, Americans have a secret love affair with taxes - that is of course, as long as they're paid by someone else. Call it rightful vengeance. It simply feels good to see others pay their "fair" share of taxes, almost primal.

This is why most of us are happy to raise taxes on cigarettes (because most of us don't smoke) and why taxes to support schools are overwhelming more popular with renters than with homeowners (because in most states, schools are supported by property taxes on owned residences). As Huey Long said, "Don't tax you, don't tax me, tax the man behind the tree".

But the real question of income inequality is worth considering. Why is it that Mel Gibson has earned so much money that he can afford to pay his ex-wife a divorce settlement of $450 million? Is his value to society so infinitely greater than that of a school teacher teaching your children, a doctor who treats them when they're sick or the police who protect them?

Two reasons. The first one is plainly societal. If we turn back the clock 100 years, actors were broke. They acted in small, underfunded acting companies where the actors worked for pennies. Babe Ruth, the undisputed greatest athlete of his day, died with barely a dime in the bank. Somewhere along the road, though, these dynamics changed and boy did they ever.

Today the fact is, the simple reason the studios can pay Johnny Depp $50 million per movie is because they expect they will earn this back and far more at the box office. So, it's really us - those of us who go to see his films that are offering Depp a seat at the front of the 1% bus. This is, of course, equally true of Derek Jeeter, Kobe Bryant, Lebron James and so on.

The interesting question to ask then, is why isn't this equally true of your family doctor, dentist or kids' school teacher. And the reason is that we as a society don't place the same value on their contributions, because we aren't willing to transfer the same economics to these sectors that we gladly shell out for our own entertainment. And we're willing to voice our support not with our votes or our words, but with our wallets! It's like bemoaning how awful it is that celebrities are hounded by the paparrazi as we scoop up tabloid magazines at the supermarket that, of course, create the opportunities for the paparrazi to sell their photos.

The second reason for this great income inequality is that those whose nests aren't feathered by Americans' tastes for consumption are deftly aided by their friends in Washington. You may think, "no way Blankfein is worth $10 million". The guy can't act his way out of a paper bag (as we saw in the Senate hearings) and he doesn't look nearly as good as Gaga in a leotard. Points well taken. But what Lloyd and execs on Wall Street, along with big Pharma, Oil, Defense, Aerospace and many other industries have long since realized is that they can tip the scales of profitability strongly in their company's favor by cozying up to those on the hill who regulate, purchase products and services and provide funding incentives for their businesses. As long as elections cost increasing amounts of cash to fund, politicians will increasingly listen and listen hard to whomever hands it out to them.

So there you have it. Income inequality. Look no further than Washington and your living room to get a better understanding of it.